Paul Bugden, Bugden + Co., London

Longer term contracts in the field of logistics, freight forwarding and international sale and supply of goods very commonly include stipulations requiring the parties to negotiate, and even reach agreement, upon various matters (arising out of the performance of the contract or otherwise) through some new or further bargain by way of extension, modification or supplementation to their existing contract.

  • Considerable care is required in the drafting of all such clauses so as to set out with some precision what exactly is expected of the parties; and especially just what exactly they are supposed to negotiate or agree upon (and to what end purpose) and by what sufficiently defined procedure and over what defined time scale. It is essential to accurately identify, and make provision for the attainment of, the ultimate objective of the agreement required by the clause by making adequate provision for what is to happen where one party fails to co-operate in the requisite process of negotiation and also indeed where, despite best efforts of both parties, no agreement can in fact be reached between them.
  • Though, as is well known, a bare agreement to agree is not a legally binding contract, where the agreement to agree is just one small element of an otherwise enforceable contract different considerations may apply. Of course in such a case the court still cannot write a new or further bargain for the parties but it may, it is suggested, nevertheless imply an obligation to negotiate in good faith in suitable cases with the consequence that a liability may arise in appropriate cases on the part of a defaulting party to the other party in damages for loss of chance as to the outcome.
  • It may be of especial importance to provide some independent mechanism for making any ‘agreement’ the parties have themselves been unable to reach. Hence the importance of some provision in their contract for independent or ‘expert’ determination/valuation. Here of course lies the fundamental distinction between arbitration and expert determination and evaluation. The former is effectively a time a judicial process whereas the latter may not only determine disputes but also if suitably empowered by the parties write, or re-write, the contract term and conditions.
  • Otherwise where work has been done, or services provided, under the contract on the basis of agreement to negotiate or agree the provider party may be left at best with a very limited remedy through implication of some collateral contract for payment or in the law of restitution.
  • However in many cases the absence of the agreement envisaged by the contract (i.e. the failure of the negotiations) may simply be a condition precedent to exercise of some further unilateral right or remedy of party (e.g. rate rise or as discussed further below initiation of arbitration) or the automatic occurrence of some event in the contract (e.g. termination or extension of the contract) so that the issue is whether the condition is only sufficiently certain so as to constitute a condition precedent, rather than an actionable promise in itself, and if so whether it has been fulfilled.
  • Much the same considerations apply to express agreements to negotiate. Just as a bare agreement to agree is unenforceable so a bare agreement without more to negotiate is unenforceable. In the leading case of Walford v Miles [1992] 2 AC 128 the owner of a business undertook to terminate negotiations to sell the business to a third party in exchange for the plaintiff’s promise to continue negotiations to buy the business. The House of Lords held that as the plaintiff’s promise to continue negotiations was unenforceable the owner was not liable in damages when he terminated negotiations with the plaintiff.
  • However Walford may it is suggested legitimately be distinguished from those cases where the agreement to negotiate is but one term of an otherwise concluded, extant and enforceable contract so that the particular obligation to negotiate might be enforced through, say, an action in damages for loss of chance or where negotiation is a pre-condition to exercise of some contractual right, remedy or occurrence.

An agreements to negotiate may often be found in dispute resolution clauses where the obligation to negotiate a compromise of the dispute is expressed as a contingent condition precedent to commencement of arbitration or suit in which case the tribunal will only have jurisdiction if the condition is fulfilled.

One such clause recently came before the English court in Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm) (01 July 2014) Teare J where the court was presented with a long-term supply contract which contained a dispute resolution provision in the following terms;

In case of any dispute or claim arising out of or in connection with or under this LTC including on account of a breaches/defaults mentioned in 9.2, 9.3, Clauses 10.1(d) and/or 10.1(e) above, the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.

All disputes arsing out of or in connection with this LTC shall be finally resolved by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (“ICC”). The place of arbitration shall be in London (“UK”). The arbitration shall be conducted in the English language.

  • The claimant submitted that the clause required a condition precedent to engage in time limited negotiations to be satisfied before the arbitrators would have jurisdiction to hear and determine the claim and that such condition precedent was not satisfied with the result that the tribunal lacked jurisdiction. They contended that the requirement was not fulfilled because there had not been a continuous period of four weeks of consultations to resolve the claims which were the subject of the dispute.

In response the respondent submitted that the condition precedent as a mere agreement to negotiate was unenforceable but that if it were enforceable then it had been satisfied and as such the arbitrators had jurisdiction.

The judge held that the obligation to negotiate before commencing arbitration was not void for uncertainty (a conclusion he thought to be consistent with the public policy of encouraging parties to resolve disputes without the need for expensive arbitration or litigation) but nevertheless on the facts that the requisite four week period had in fact passed before arbitration had been commenced so that the arbitrators had jurisdiction.

He rejected the argument that the ‘friendly discussions’ must themselves last four weeks. The discussions might last for a period of four weeks but if no solution was achieved a party might commence arbitration. On the other hand the discussions might last for less than that, in which case a party must wait for a period of four continuous weeks to elapse before he commenced arbitration.

The obligation to seek to resolve disputes by friendly discussions was also held by the judge to import an obligation to seek to do so in good faith to give business efficacy to the contract but interestingly he did not consider that good faith required the parties to be faithful to their existing legal bargain when negotiating. Whilst the parties must have expected that fidelity to same would or might be an important part of their negotiations other, more commercial considerations, might he thought properly be raised in the negotiations by a party without derogating from his requirement to negotiate in good faith.